In exchange for a $400 million fixed commitment line of credit, your firm has agreed to do the following:
1) Pay 2.1 percent per quarter on any funds actually borrowed.
2) Maintain a 4 percent compensating balance on any funds actually borrowed.
3) Pay an up-front commitment fee of .150 percent of the amount of the line? Based on this information, answer the following:
a) Ignoring the commitment fee, what is the effective annual interest rate on this line of credit?
b) Suppose your firm immediately uses $130 million of the line and pays it off in one year. What is the effective annual interest rate on this $130 million loan?